The past year gave many Americans the financial shock of their lives. Though the trouble appeared to erupt from the investment banks of Wall Street, the roots of the problems reached deep into the credit practices of lenders across the country, and it didn’t take long before consumers everywhere felt the pain.
As citizens worried over their nest eggs and grasped for some kind of economic anchor, the last thing they needed was to see tremors run through the banking industry. But banks were clearly showing signs of the times.
A report from the Federal Deposit Insurance Corporation shows that almost one in four U.S. commercial banks were unprofitable in third-quarter 2008. Not surprisingly, when the federal government announced it would inject billions into banks that qualified for help, many of the nation’s stalwarts leaped to apply.
So how have local banks fared thus far in the turmoil that’s rocked every other part of the financial services industry? Surprisingly well, actually.
The latest available figures from the FDIC, which insures deposits at and regulates many of the nation’s banks, show that commercial banks headquartered in Louisiana are feeling somewhat less pressure on their balance sheets than their peers around the country.
“We’re not in the position that some other states, such as Florida, Georgia, Nevada and California are in,” says Sid Seymour, chief examiner in Louisiana’s Office of Financial Institutions. “We’ve not seen the dramatic housing value declines here that have caused major problems elsewhere.”
That is in part because Louisiana housing values never became as inflated as those in some other states and therefore were less vulnerable to sudden declines. Also, Louisiana’s ongoing hurricane recovery has helped to prop up employment here, and the jobs have fueled housing demand.
“I can’t say it’s not slowing down in some parts of the state, but overall loan demand is still pretty good,” Seymour says.
Reports to the FDIC for third-quarter 2008, which ended Sept. 30, show that New Orleans-area banks, while feeling some pressure, are holding up well based on at least one key indicator.
That indicator is a percentage known as the “capital ratio.” The ratio measures a bank’s relative strength by gauging its ability to withstand any risk contained in its loan portfolio. The ratio helps regulators assess how a bank will fare if problems arise, such as large numbers of loan delinquencies or defaults.
As of Sept. 30, some 7,100 U.S. commercial banks insured by the FDIC had an average risk-based capital ratio of 9.5 percent. That’s a healthy average considering that some of the largest banks had already experienced serious problems by the end of the quarter.
Banks in the greater New Orleans area compared favorably with their counterparts. The capital ratio for the 10 largest banks headquartered in the metropolitan area ranged from 8.1 percent to as high as 19 percent (see table). Those capital positions put the banks in good stead to withstand potential loan problems. But every institution must continually re-evaluate itself as market conditions change.
In its published analysis of the banking industry, the FDIC noted: “Troubled assets continued to mount at insured commercial banks and savings institutions in the third quarter of 2008, placing a growing burden on industry earnings.”
Louisiana has not been immune. While loan problems rose only slightly or not at all at some locally based banks during the third quarter, other New Orleans-area banks moved more of their loans into the “non-current” category. The institutions then had to put more cash into their reserves in case they have to cover losses from the loans. The money to boost those reserves comes directly from the banks’ bottom lines.
When results from the fourth quarter of 2008 become available, the health picture of local banks will likely change again. Chances are, more loans will have gone south during that period. But some banks also will begin to benefit from new capital injected by the federal government.
As part of the government’s response to the financial market meltdown of 2008, Congress agreed to spend $250 billion on selected banks to boost their capital and stimulate lending. While the lion’s share of that money will go into the largest banks, such as JPMorganChase, many smaller banks around the country also have applied for the assistance.
Of the 135 banks headquartered in Louisiana, Seymour says at least three dozen have applied to receive “capital stimulus” funds. The total requested could be around $700 million. It is not yet known which banks have actually received the money.
Seymour emphasizes that the assistance should not be considered a “bailout.” A bank must be deemed healthy in order to receive the new capital, he notes. Also, recipient banks must agree to issue new preferred stock in return for the capital, making them accountable to the U.S. Treasury for using the money as it was intended.
That said, the rules of the capital stimulus program do not require the receiving banks to immediately begin making more loans.
Depending on how long it takes for the economy, overall, to start firing on all cylinders, it could be a long time before we know whether or not the capital stimulus program worked.